I know I always talk about the dangers of credit cards, but the truth is that these are financial tools that you can use for a number of purposes.
Like any tool, you can use it poorly: you can charge more than you can truly afford, leave balances on your card that accrue massive interest, and end up in a lot of debt that’s hard to repay.
Or, you can use the tool wisely. And when you use credit cards wisely, they can actually help you save 1 percent to 3 percent on the money you need to use anyway to buy essentials (like groceries and household supplies).
Use Your Card to Save on Spending You Have to Do Anyway
By using a credit card that offers reward points or cashback, you can get a small amount of your money back when you make purchases.
There are a few important caveats to understand first, though:
- This only works if you charge nothing but necessary items to your card! This is not an excuse to go on a shopping spree. You’re not saving if you could have avoided spending that money entirely.
- This isn’t an excuse to spend more on the essentials, either. Responsible credit card use means creating a tight spending plan first, and then using the card as a tool to purchase the things you accounted for in you plan.
- The best way to use points is to get cashback. With reward points, there’s always the temptation to spend more than you would have normally (because points rarely pay for everything and you’ll end up spending out of pocket to cover the difference).
So this is by no means a free pass to use your credit card wildly. But if you use it only on what you need and select the cashback option, you can save 1 to 3 percent on your purchases (depending on the card you have).
How to Determine When to Use Your Card
If you’re still not sure when it’s okay to use you card and when you should put it away, you can use my guide to help you.
I created this licence system that helps you know when it might be a good time to use a credit card:
Learner Licence – You’ve got your learner licence if you don’t know what you are spending and you have a balance on your credit card. Sound familiar? Don’t touch your credit card if this is you!
Here’s what to do instead:
- Take a hard look at your spending plan. Where can you cut expenses and spend less?
- Create a debt repayment plan. Focus on paying off your credit card balances as quickly as possible.
- Practice living within your means and sticking with the tight spending plan you created. Build a savings habit and prioritize building your savings over spending money on more stuff.
Once you build better financial habits, you may be able to graduate to a provisional licence for credit card use.
Provisional Licence – You have a provisional licence if you don’t have credit card debt but you have a tendency to overspend on items like clothes or food. This is where I am.
I use my credit card only for bills and things I don’t have a lot of control over like electricity. I have an automated payment set up for my credit card statement each month to ensure I pay back all the charges and never end up owing interest.
I use debit or cash when I want to spend on the things I know are temptations for me, and only use my credit card for necessities.
Full Licence – You’ve got your full licence if know exactly where your money goes, you stick to your spending plan, and you don’t have a credit card debt.
If this is you, you might benefit from using your credit card for all your expenses because you’re extremely responsible with your spending and aren’t tempted to spend on “extras” that you don’t really need.
I would love to hear from you: which credit card licence you think you have? Learner, provisional, or full licence? If you don’t have a full licence, what do you think you need to do to get there?
This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a financial adviser, whether the information is appropriate in light of your particular needs and circumstances. No representation is given, warranty made or responsibility taken about the accuracy, timeliness or completeness of information.
The information (including taxation) provided in this blog is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice and consider the Product Disclosure Statement. The author, Adele Martin, is a Certified Financial Planner at Firefly Wealth which is an Authorised Representative of RI Advice Group ABN 23 001 774 125 AFSL 238429. The views expressed in the blog are solely those of the author, they are not reflective or indicative of RI licensees’ position and are not attributed to RI Advice Group. They cannot be reproduced in any form without the written consent of the author.